Another Autumn Crash?
BY PURU SAXENA
After reviewing a host of technical and fundamental data, we are of the view that the world’s stock and commodity markets may be on the verge of a big slide. Remember, for almost two years, the Federal Reserve supported the ‘risk trade’ via quantitative easing. However, it has now left the party, which means that the private-sector credit contraction in the developed world is reasserting its upper hand. For instance, a variety of credit spreads are rising, interest rates on Eurodollars are appreciating (shortage of dollars outside the US), the Federal Reserve is desperately trying to provide liquidity via its swap lines and the US Treasury market is signaling a severe economic contraction.
Furthermore, the US Dollar Index has broken above its 50-day and 200-day moving averages, the VIX is elevated and the NYSE Operating Companies Only Advance/Decline Line has broken below its recent consolidation range. Thus, all the key data points we monitor are flashing red and this is the time to be defensive.
It is notable that already, the MSCI Emerging Markets Index has broken below its early August low and a number of the European stock markets have also done the same. On the contrary, the US indices are still relatively firm and a clear break below the recent lows will open up the possibility of a serious sell off. Moreover, the prices of various industrial commodities have softened recently and this suggests that the global economy is slowing down considerably.